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MOSL: HINDUSTAN ZINC (Neutral)-In-line performance despite production challenges

HINDUSTAN ZINC: In-line performance despite production challenges; Expect 8% volume CAGR but valuations rich; Maintain Neutral

(HZ IN, Mkt Cap USD13.5b, CMP INR220, TP INR216, 2% Downside, Neutral)

 

• Zinc premiums offset lower volumes: EBITDA of INR24.8b (-11% QoQ/-9% YoY) came in line with our estimate of INR24.5b, as the impact from lower metal volumes (-6% QoQ) was offset by higher-than-expected zinc premiums. PAT declined 12% QoQ/8%YoY to INR17.7b.
• Geo-tech challenges impact production: Mine production declined 13% QoQ owing to geo-tech issues at the SK mine. Ore grade was also lower due to an adverse mine mix. Management expects SK's production to improve with the commissioning of the paste fill plant (Jun'19). The company has maintained its guidance of 1mt mine production for FY20.
• Cost of production (COP) increases: Reported CoP increased USD80/t QoQ to USD1,067/t due to lower volumes and higher power cost. Generation from the company's captive plants was impacted by water scarcity, leading to external purchase of power. However, HZ expects CoP to decline amid normalization of power cost, volume-led benefit and lower coal costs.

Valuations bake in scale led benefit; Maintain Neutral

• While the zinc market remains in deficit, factors such as (a) demand concerns due to ongoing trade war/weakening global demand and (b) anticipated higher supply have led to a fall in LME zinc prices to ~USD2,480 (v/s Mar'19: ~USD3,000). Accordingly, we have lowered our FY20 (average) zinc LME estimate to INR2,600.
• We expect mine production CAGR of 8% over FY19-21 and CoP to decline as shafts commission at RA and SKM. However, at zinc LME of USD2,600/t for FY20, the stock is trading at 6.6x EV/EBITDA. Maintain Neutral with a target price of INR216 based on 6.5x FY20E EV/EBITDA.